You might have invested in an ICO, which includes a lock-up period for the tokens received. During the lock-up period, you will usually not be able to transfer, sell, or otherwise dispose of the tokens, which must be considered when tracking the cost basis if you have other transactions with the same token during the lock-up period.
Let's look at Flow as an example. The Flow project had its token sale on CoinList in September-October 2020, and all tokens bought had a two-year lock-up period, with 50% of the tokens unlocking after one year. In this example, we will assume we have other transactions with FLOW during the lockup period to understand better how the cost basis will be tracked.
Here is a summary of the transactions:
Bought 1000 FLOW in the ICO for $380 - October 1, 2020
Started staking 1000 FLOW on CoinList - March 1, 2021
Received 10 FLOW in staking rewards - April 15, 2021
Received 20 FLOW in staking rewards - June 15, 2021
Sold 30 FLOW for $300 - July 1, 2021
Bought 250 FLOW for $6,000 - August 1, 2021
Unlocked 500 FLOW on CoinList - October 1, 2021
Unlocked 500 FLOW on CoinList - October 1, 2022
Sold 250 FLOW for $280 - December 1, 2022
Because the FLOW tokens bought in the ICO are subject to a lock-up period, selling 30 FLOW on July 1, 2021, must consider the cost basis from the 30 FLOW received from staking rewards rather than the ICO tokens, which also have a very different cost basis. To do this in Coinpanda, we can add the following transaction:
Trade (Swap): 1000 FLOW → 1000 FLOW_LOCKED on March 1, 2021
Doing this, the original cost basis of the ICO tokens will be transferred to the locked FLOW tokens to avoid spending those tokens until they are unlocked after the lock-up period. This means that when 30 FLOW are sold on July 1, 2021, the cost basis will be taken from the FLOW received as staking rewards earlier in 2021.
Similarly, when the FLOW tokens are unlocked, we need to add two transactions this way:
Trade (Swap): 500 FLOW_LOCKED → 500 FLOW on October 1, 2021
Trade (Swap): 500 FLOW_LOCKED → 500 FLOW on October 1, 2022
Now, you will have 1250 FLOW tokens, including the 250 FLOW bought earlier. The total cost basis will be $6,380 since the cost basis has been transferred from LOCKED_FLOW to FLOW without realizing any gains.
When 250 FLOW is sold on December 1, 2022, the cost basis will be calculated from the oldest to the newest acquisition, assuming FIFO is the chosen cost basis method. This might sound confusing, but it is important to understand that adding Trade (Swap) transactions to Coinpanda means that the acquisition date will also be changed since a Trade (Swap) is similar to exchanging one token for another, except that the cost basis is transferred without realizing any gains. In this example, selling 250 FLOW on December 1, 2022, will therefore consider the cost basis from FLOW bought for $6,000 rather than the tokens bought in the ICO with a significantly lower cost basis.
Why is not the original acquisition date considered after the unlocking?
The short answer is that whenever a token is traded, swapped, or otherwise exchanged for a different token, the acquired tokens will take on an acquisition date similar to the time of the transaction.
Another thing to consider is that tax authorities such as the IRS have stated clearly in the past that a transaction is considered a taxable event at the time when the tokens become available to spend, transfer, or otherwise dispose of instead of the actual time the transaction occurred. For example, if you invest in an ICO and pay with ETH in August 2022, but the tokens bought are not available to be spent before December 2022, you should consider the ETH tokens being disposed of in December rather than in August, which can have a major impact on the realized gains.
By extension, it can be argued that the same principle applies to the example in this article, such that you should consider the 1000 FLOW tokens bought in the ICO as acquired on two separate occasions when they were unlocked rather than the ICO date. This is exactly how the transactions are considered in the example above and explains why the cost basis for 250 FLOW sold is not considered from the FLOW bought in the ICO.
The current tax regulations surrounding DeFi, ICOs, and token vesting are far from complete. We strongly encourage consulting a tax professional in your country if you have other related questions.